Legislation Removes Some Uncertainty on Estate Taxes

The recent "fiscal cliff" legislation provides small businesses and farms some much-needed relief from uncertainty about estate taxes, says a University of Missouri Extension agricultural economist.

"We were scheduled to drop the estate tax threshold from $5 million to $1 million on Jan. 1, but they extended the $5 million level," said Ron Plain. "So now estate taxes start on inheritances greater than $5 million. The other thing Congress did was cap the tax rate at 40%."

The top tax rate on estates had been scheduled to increase from 35% to 55%.

Also, unlike past legislation on estate taxes, which extended lower rates for a limited time, these changes have been made indefinite, Plain said.

Plain says that while farmers have a lot of assets in terms of land and equipment, limited cash income means that estate taxes can be a problem. By leaving the exemption at $5 million, a lot more family farms will be able to transfer from one generation to the next without getting a huge tax bill, he said.

However, because of rising land values, the $5 million exemption may not be enough to shield some family farms from estate taxes, Plain added.

"For the typical farm, 70% of all the investment is in land," he said. "So if you have a father-son operation or siblings farming together, you can very quickly get above that $5 million threshold and face some sizable estate taxes."

Plain recommends exploring different estate planning options with a tax professional in order to be able to pass on the family farm while holding estate taxes at a manageable level.